Is the single currency doomed? The problems were there from the start

These days we are all committed to sacrifice, whether attributable to tax increases, reduced public services or declining incomes. This sacrificial thread affects government too, although in a different way. Coalition, by definition, requires the combining parties to sacrifice, or place on the back burner, many of the policies for which they hoped the election would give them a mandate.

In some cases the archiving of policies has saved their advocates much embarrassment. The Lib Dems’ commitment to joining the euro is just such a case. They probably finalized their manifesto before chaos erupted in Greece and unemployment in Spain topped 20 per cent, but who, knowing what we know now, can take seriously their official policy, as clearly stated in their manifesto: “It is in Britain’s long-term interest to be part of the euro”? There are qualifications, of course: first, it would have to enjoy popular support in a referendum; and, second, Britain should join only “when the economic conditions are right”, whatever that may mean!

It goes beyond economics

Well, the lesson of Greece, Spain, Portugal and Italy is that the “economic” conditions can never be right. The degree to which sovereignty is forfeited when a nation abandons its currency goes way beyond basic economics. Giving up the currency means, in the final analysis, giving up the independent ability to set taxes, interest rates and public spending priorities without having to pay heed to any external political fetter. Loss of the currency is also the loss of any opportunity to kick-start recovery by devaluing or revaluing.

That is what having independent monetary control means.

Compare Greece and Britain. They both have deficits of roughly 12 per cent of national income (GDP). Yet while Greece teeters on the brink of bankruptcy, in Britain we can debate the phasing of planned tax increases and spending cuts. The government can borrow in its own currency, even printing money to repay debts if required, subject of course to the risk of inflation if the Bank of England miscalculates. But it is not subservient to bond market volatility or the IMF. That is what having independent monetary control means.

The opposite is the case in the eurozone, where its single currency can survive in the long term only if all member governments are prepared mutually to underwrite each other’s debts.

In a single economy this works perfectly well, such as when parts of Britain are designated as development areas or enterprise zones in which new businesses are given grants or tax-breaks to stimulate the local economy. In effect, the robust economies of the South East are subsidizing less prosperous parts of the North West and the Welsh valleys. This is normal and principled. When, however, hard-working and disciplined members of the eurozone, such as Germany and the Netherlands, are forced to underwrite those they consider to be profligate wasters, any government doing the forcing is liable to be annihilated at the polls.

When it all goes wrong

And for what? Why should taxpayers in a nation of skilled workers, industrious entrepreneurs and frugal savers find themselves shackled to irresponsible south European governments to avert the collapse of a currency that, from the day it was introduced 11 years ago, lacked any solid foundation? The inability of eurozone countries to control their borrowing leaves them hostage to the whims of the interbank market, which now spurns Spanish or Greek bonds as so much worthless paper.

Currently the eurozone cannot generate sufficient wealth to settle its collective debts. Governments can bail out banks, but bailing out other governments? The Greek package was hailed by its architects as a pragmatic stop-gap that would “buy time”. Well, it did – two whole weeks. That was the markets’ equally pragmatic response.

The long-term solution? There isn’t one. How could there be, when back in 1999 they didn’t even see that there was a problem?